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After the collapse of the Soviet bloc many of the transition economies experienced significant inflation, largely because their new monetary authorities and undeveloped tax infrastructure
induced them to resort to generating revenue through seignorage. In Ukraine inflation rates
reached as high as 133 percent per month. Traditional monetary theory holds that raising
revenue through money creation causes a simple trade-off: a higher rate of money growth
generates higher seignorage, but the associated inflation causes a decline in demand for real cash
balances, reducing seignorage. The higher the monetary growth rate, the larger the real balance
effect. Therefore, the revenue-maximizing rate of money creation must be realized before the
decline in demand for real cash balances becomes the dominant effect. Visiting Scholar David
Alan Aschauer cautions, however, that there may be not one revenue-maximizing rate but short
and long rates subject to exogenous shocks caused by, for example, changes in inflation
expectations.